13 Dec What are Second Mortgages?
As part of our continuing work to keep our clients and readers up to date with the latest trends and opportunities we are taking a look at an increasingly popular trend – Second Charge or Second Mortgages.
These second charge mortgages sit behind your primary mortgage – as they are a secured loans they use the borrowers’ home as security. There are a few things you need to know before you set out to get a second mortgage. If you would like to talk to a member of our mortgage advice team about your options, give us a call on 01753 439000 or email us.
How does it all work?
You will only be eligible for a second mortgage if you are already a homeowner but you don’t necessarily need to live in the property against which you borrow.
Am I eligible?
In today’s market the mortgage lenders have to comply with stricter UK and EU rules; these govern:
- Mortgage advice,
- Affordable lending
- Dealing with payment difficulties.
This means that you will have to go through the same affordability checks as you did when obtaining your original mortgage. If you got through the affordability and stress tests the first time you should be fine, however if your circumstances have changed it may have a different outcome.
How much could I borrow?
This depends on the amount of equity you have in your home. Taking out a second mortgage means you will have two mortgages on your home. If you had a home worth £300k and you have £200k remaining on your existing mortgage, you would have £100k equity and that would be the maximum you could borrow.
When would I need a second mortgage?
There are a few reasons why you might want to take out a second charge mortgage:
- You may be struggling to get an unsecured personal loan.
- If your credit rating has changed since taking out your first mortgage, remortgaging could mean you end up paying more interest on your entire mortgage, rather than just on the extra amount you want to borrow.
- If your mortgage has a high early repayment charge, it might be cheaper for you to take out a second charge mortgage rather than to remortgage.
When is a second charge mortgage cheaper than remortgaging?
Imagine you are part way through your fixed rate mortgage – the value of your home has increased. You would like to start a family but you need a lump sum to refurbish/improve/prepare your home. You have two options; do you remortgage or take out a second charge mortgage?
- If you were to remortgage, you would probably have to pay an early repayment penalty and there’s still no guarantee that you’d get a better interest rate than your current rate – in fact you may end up paying more.
- If you were to take out a second charge mortgage, you would only pay a higher interest rate on the additional amount you borrow rather than paying extra on the entire mortgage. Of course you’d need to pay the second mortgage arrangement fees but, this is likely to be far less than the early repayment.
When not to use a second mortgage
Second mortgages can be useful, but taking one out is a big step and should not be taken lightly.
- You could lose your home if you cannot keep up repayments on either your mortgage or the second charge mortgage. So if you are only just managing to cover your existing repayments, you should steer clear.
- Some people think that using a second charge mortgage to cover smaller debts like credit cards will help. Converting unsecured credit into secured credit increases your chances of having your property repossessed – don’t do it.
Be aware that 3 years ago (2014), over 400 properties were repossessed by second mortgage lenders.
What if I move house?
If you sell your home, you will either pay off your second charge mortgage or transfer it to a new mortgage.
Some things to consider before taking out a second mortgage
We are bound by the rules set out by the FCA when dealing with your enquiry which are designed to protect you. If you decide not to speak to a professional you may end up choosing a loan that could land you in hot water.
Before you take out a second mortgage, make sure you speak to us. While this is an informative article, your specific circumstances haven’t been taken into account. Speak to one of our advisers on 01753 439000 or email us for more information – you can also follow us on Facebook, Twitter and LinkedIn to stay up to date on the latest industry news and products.
Photo credit: By studiopure